Consumer Behavior and Firm Competition

Understanding consumer behavior is critical for firms' decision making. How consumers make decisions about what they want and buy directly affect the profits of firms. Therefore, it is important to consider consumer behaviors and incorporate them into the model when studying the optimal strategy of firms and competition between firms. In this dissertation, I study rich and interesting consumer behaviors and their impact on firms' strategy in two essays. The first essay considers consumers' shopping cost which leads to their preference for one-stop shopping. I examine how store visit costs and consumer knowledge about a product affect the strategic store choice of consumers and, in turn, the pricing, customer service and advertising decisions of competing retailers. My analysis offers insights on how specialty stores can compete with big-box retailers. In the second essay, I focus on a well-established psychology phenomenon, cognitive dissonance. I incorporate the idea of cognitive dissonance into a model of spatial competition and examine its implications for selling strategy. I provide new insight on the profitability of advance selling and spot selling as well as the pricing of bundle and its components. Collectively, two essays in this dissertation introduce novel ways to model consumer behaviors and help to understand the impact of consumer behaviors on firm profitability and strategy.

Managing dynamic competition

In many important high-technology markets, including software development, data processing, communications, aeronautics, and defense, suppliers learn through experience how to provide better service at lower cost. This paper examines how a buyer designs dynamic competition among rival suppliers to exploit learning economies while minimizing the costs of becoming locked in to one producer. Strategies for controlling dynamic competition include the handicapping of more efficient suppliers in procurement competitions, the protection and allocation of intellectual property, and the sharing of information among rival suppliers. (JEL C73, D44, L10).

"Call for prices": Strategic implications of raising consumers' costs

Many consumer durable retailers often do not advertise their prices and instead ask consumers to call them for prices. It is easy to see that this practice increases the consumers' cost of learning the prices of products they are considering, yet firms commonly use such practices. Not advertising prices may reduce the firm's advertising costs, but the strategic effects of doing so are not clear. Our objective is to examine the strategic effects of this practice. In particular, how does making price discovery more difficult for consumers affect competing retailers' price, service decisions, and profits? We develop a model in which a manufacturer sells its product through a high-service retailer and a low-service retailer. Consumers can purchase the retail service at the high-end retailer and purchase the product at the competing low-end retailer. Therefore, the high-end retailer faces a free-riding problem. A retailer first chooses its optimal service levels. Then, it chooses its optimal price levels. Finally, a retailer decides whether to advertise its prices. The model results in four structures: (1) both retailers advertise prices, (2) only the low-service retailer advertises price, (3) only the high-service retailer advertises price, and (4) neither retailer advertises price. We find that when a retailer does not advertise its price and makes price discovery more difficult for consumers, the competition between the retailers is less intense. However, the retailer is forced to charge a lower price. In addition, if the competing retailer does advertise its prices, then the competing retailer enjoys higher profit margins. We identify conditions under which each of the above four structures is an equilibrium and show that a low-service retailer not advertising its price is a more likely outcome than a high-service retailer doing so. We then solve the manufacturer's problem and find that there are several instances when a retailer's advertising decisions are different from what the manufacturer would want. We describe the nature of this channel coordination problem and identify some solutions. © 2010 INFORMS.

Entry and competition in generic biologics

Patents for several blockbuster biological products are expected to expire soon. The Food and Drug Administration is examining whether biologies can and should be treated like pharmaceuticals with regard to generics. In contrast with pharmaceuticals, which are manufactured through chemical synthesis, biologies are manufactured through fermentation, a process that is more variable and costly. Regulators might require extensive clinical testing of generic biologies to demonstrate equivalence to the branded product. The focus of the debate on generic biologies has been on legal and health concerns, but there are important economic implications. We combine a theoretical model of generic biologies with regression estimates from generic pharmaceuticals to estimate market entry and prices in the generic biologic market. We find that generic biologies will have high fixed costs from clinical testing and from manufacturing, so there will be less entry than would be expected for generic pharmaceuticals. With fewer generic competitors, generic biologies will be relatively close in price to branded biologies. Policy makers should be prudent in estimating financial benefits of generic biologies for consumers and payers. We also examine possible government strategies to promote generic competition. Copyright © 2007 John Wiley & Sons, Ltd.

Evolving brand-name and generic drug competition may warrant a revision of the Hatch-Waxman Act.

The evolution of pharmaceutical competition since Congress passed the Hatch-Waxman Act in 1984 raises questions about whether the act's intended balance of incentives for cost savings and continued innovation has been achieved. Generic drug usage and challenges to brand-name drugs' patents have increased markedly, resulting in greatly increased cost savings but also potentially reduced incentives for innovators. Congress should review whether Hatch-Waxman is achieving its intended purpose of balancing incentives for generics and innovation. It also should consider whether the law should be amended so that some of its provisions are brought more in line with recently enacted legislation governing approval of so-called biosimilars, or the corollary for biologics of generic competition for small-molecule drugs.

Decision making across social contexts: Competition increases preferences for risk in chimpanzees and bonobos

Context can have a powerful influence on decision-making strategies in humans. In particular, people sometimes shift their economic preferences depending on the broader social context, such as the presence of potential competitors or mating partners. Despite the important role of competition in primate conspecific interactions, as well as evidence that competitive social contexts impact primates' social cognitive skills, there has been little study of how social context influences the strategies that nonhumans show when making decisions about the value of resources. Here we investigate the impact of social context on preferences for risk (variability in payoffs) in our two closest phylogenetic relatives, chimpanzees, Pan troglodytes, and bonobos, Pan paniscus. In a first study, we examine the impact of competition on patterns of risky choice. In a second study, we examine whether a positive play context affects risky choices. We find that (1) apes are more likely to choose the risky option when making decisions in a competitive context; and (2) the play context did not influence their risk preferences. Overall these results suggest that some types of social contexts can shift patterns of decision making in nonhuman apes, much like in humans. Comparative studies of chimpanzees and bonobos can therefore help illuminate the evolutionary processes shaping human economic behaviour. © 2012 The Association for the Study of Animal Behaviour.

Inhibition-Induced Forgetting Results from Resource Competition between Response Inhibition and Memory Encoding Processes.

UNLABELLED: Response inhibition is a key component of executive control, but its relation to other cognitive processes is not well understood. We recently documented the "inhibition-induced forgetting effect": no-go cues are remembered more poorly than go cues. We attributed this effect to central-resource competition, whereby response inhibition saps attention away from memory encoding. However, this proposal is difficult to test with behavioral means alone. We therefore used fMRI in humans to test two neural predictions of the "common resource hypothesis": (1) brain regions associated with response inhibition should exhibit greater resource demands during encoding of subsequently forgotten than remembered no-go cues; and (2) this higher inhibitory resource demand should lead to memory encoding regions having less resources available during encoding of subsequently forgotten no-go cues. Participants categorized face stimuli by gender in a go/no-go task and, following a delay, performed a surprise recognition memory test for those faces. Replicating previous findings, memory was worse for no-go than for go stimuli. Crucially, forgetting of no-go cues was predicted by high inhibitory resource demand, as quantified by the trial-by-trial ratio of activity in neural "no-go" versus "go" networks. Moreover, this index of inhibitory demand exhibited an inverse trial-by-trial relationship with activity in brain regions responsible for the encoding of no-go cues into memory, notably the ventrolateral prefrontal cortex. This seesaw pattern between the neural resource demand of response inhibition and activity related to memory encoding directly supports the hypothesis that response inhibition temporarily saps attentional resources away from stimulus processing. SIGNIFICANCE STATEMENT: Recent behavioral experiments showed that inhibiting a motor response to a stimulus (a "no-go cue") impairs subsequent memory for that cue. Here, we used fMRI to test whether this "inhibition-induced forgetting effect" is caused by competition for neural resources between the processes of response inhibition and memory encoding. We found that trial-by-trial variations in neural inhibitory resource demand predicted subsequent forgetting of no-go cues and that higher inhibitory demand was furthermore associated with lower concurrent activation in brain regions responsible for successful memory encoding of no-go cues. Thus, motor inhibition and stimulus encoding appear to compete with each other: when more resources have to be devoted to inhibiting action, less are available for encoding sensory stimuli.